2000 Investor Limit
Is a rule made by the SEC (Securities and Exchange Commission) that enforces companies with more than 2000 individual investors and worth more than $10 million in combined assets must file and report their financials to the SEC.
2000 Investor Limit Details
When you own a company, you want to keep your financial details secret because financial details contain sensitive company information, including revenue, burn rate, economic growth, workforce salary, etc. Competitors could easily exploit that information for their benefit, so small companies often keep their financials secure and out of the public eye.
Once your company grows and gains more traction, investors will be drawn to invest in your company, and assets will increase. The Securities and Exchange Commission creates a rule that enforces companies to file their financial details so the SEC can regulate it. The rule applies to companies that have more than 2000 investors, or $10 million in assets. The 2000 Investor Limit rule is also known as the 2000 Shareholder Threshold.
Example of 2000 Investor Limit
You have a new, revolutionary idea, the liquid metal battery. The battery is cheap to manufacture, lasts longer, and has more capacity—it's going to change the world! You create a working prototype, and you show it to investors. The investors are amazed by your invention and decide to invest in your company. With the initial funding secured, you set out to build your own company under the name "Limery Inc.," a quirky contraction of 'liquid-metal-battery.'
At this point, your company is a private company. Everything you do is kept secret from the outside, and you don't have to report your company information to anyone besides investors. You are free to run the business unchecked by the government, as long as you're not breaking any rules.
A few years later, you manage to produce a few thousand units of low-capacity liquid metal batteries. You sell your batteries online through your website, and you sell out in less than an hour. People have tested your product, and they said it's pretty good. As a result, you gain even more popularity. More investors come to you with their money.
Your company has grown so much, and you now have 2300 investors. Your company assets are worth around $17 million. As a good law-abiding business owner, you're going to follow the 2000 Investor Limit rule. You decided to hire a few extra accountants to help create your financial reports and then submit them to the SEC.
Once you submit the report, all the data contained within it will become public information. It means that everyone on the internet can access, download, and review your company's financial reports. Of course, any anomalies within your financial reports can be questioned by anyone, especially the SEC.
History of the 2000 Investor Limit
In 2016, the SEC decided to change the 500 Investor Limit (or the 500 Shareholder Threshold) to the 2000 Investor Limit. They both have the same meaning; the only difference is in the number of investors. You might think that 500 to 2000 is a needlessly significant increase, but it's accurate considering our current technology-driven world.
We're living in the internet era, which is a new medium for businesses to thrive. New companies, especially tech companies, can grow unbelievably fast because of the internet and all the benefits it brings. They can reach the (former) 500 Investor Limit rule without even breaking a sweat. The bad news is, most companies are unprepared to submit the financial reports to the SEC. Mostly due to their limited workforce, immature asset tracking system, or simply the lack of experience. These companies complained to the SEC because it creates a massive hindrance in their growth way too early into the companies' life cycle.
The SEC listened and decided to bump up the Investor Limit rule from 500 to 2000. This act is a part of The Jumpstart Our Business Start-ups Act, designed to loosen small businesses' regulations, effectively making small businesses thrive.
Another factor in increasing from 500 investors to 2000 investors is crowd-funding. Crowd-funding is a new kind of funding facilitated by the internet. Companies can upload their pitch online, offering rewards based on how much investors have paid them. Once the company receives its funding, it'll start the manufacturing process. Within the decided time-frame, the company will deliver its products to the initial crowd-funding users (or backers).